The Problem with Groupon

Is it just me, or does something seem fundamentally...I don't know...off about the business models of Groupon, Living Social and the like?

I just read that Living Social is a few steps closer to achieving its goal of being in 300 markets by year-end, and is boasting of some 24 million subscribers---big numbers that are nevertheless dwarfed by Groupon's 50 million subscribers in 500 markets. Both are generating fast-growing revenues and both have received big bucks from VCs.

Still, something doesn't feel right. Where I live, the Groupon discounts are getting progressively less attractive, and some of them seem downright weird. That makes sense, as companies most in need of a shot in the arm are those that have lesser consumer appeal for one reason or another. But those companies are also less likely to be able to handle the new traffic well, and coupon-bearing new customers may not be impressed. How many times can somebody get burned by an online discount before she's had enough?

I've spent my entire career and a lot of ink at BusinessWeek.com warning companies about the discounting drug. Sure, a hit from Groupon or Living Social can give a struggling company a buzz, but at what cost? No business can live from coupon to coupon, and the blather about it attracting new customers that will come back and pay full price later is the same old retread that newspaper insert and direct mail discounters have been pushing for years; some people will, most won't. Discounting, as a business strategy, is bad. Deep discounting is worse.

I recognize that Groupon and Living Social may have some sort of ace up their sleeves. They've thought about this a lot more than I have and they may have a plan to take advantage of their scale and client relationships in whole new ways. But for now, I just don't like their business models.

I realize that these words may come back to haunt me, but if I owned a steroid discounter and somebody offered me $6 billion for it, I'd take the money and run.


Steve McKee is president of McKee Wallwork Cleveland and author of When Growth Stalls: How It Happens, Why You're Stuck, and What to Do About It . Find him on Twitter and LinkedIn .